Janet Yellen Just Got Some Wiggle Room

The
July jobs report showed U.S. economy added 209,000 jobs in
July, less than the 230,000 that was expected by economists, as
the unemployment rate edged up to 6.2% from 6.1%.

But wage growth was also flat month over month and came in below
expectations on a year over year basis, data that is a little
inconsistent with
employment cost index (ECI) data reported yesterday which
showed employment costs grew 0.7% in the second quarter.

Many traders attributed yesterday's market sell-off to this
report, which some believe suggested that inflation was running
quicker than the Fed's current forecast, potentially forcing the
central bank to raise interest rates before the market expects.

But the Fed appears to still be cautious on the health of
the labor market, saying in its policy statement on Wednesday
that, "a range of labor market indicators suggests that there
remains significant underutilization of labor
resources."

And following the jobs report, Eric Green at TD
Securities said, "If strong ECI compensation data
was thought to bring the Fed closer toward raising rates the data
today does not... It doesn't change the trend toward a less
dovish Fed, it simply does not accelerate that
process."

This report showed that "core" personal consumption expenditures
in June, the Fed's preferred measure of inflation, gained 1.5%
over the prior year and 0.1% over the prior month, showing
inflation still running below the Fed's 2% target.

On Wednesday, the initial estimate for second quarter GDP showed
the economy grew at a 4% annualized pace in Q2, leading some to
suspect that economic growth might force the Fed to change its
stance on monetary policy.

The same day, the Fed's latest monetary policy decision showed
the Fed maintaining the current pace of tapering its quantitative
easing program while keeping interest rates near 0%.

In a note following today's jobs report, Russ Certo at Brean
Capital said, "As far as I can tell, this report confirms that
the Fed had it ahead of their statement."

In short, Certo speculates that the Fed knew the jobs report
would show the economy continuing to improve at what the Fed
calls a "moderate pace," but not improve so quickly that it would
force the Fed to change its policy stance.

The Fed has said it expects to conclude its quantitative easing
program in October, and is expected to keep interest rates low
for some time after that.

Recent discussion surrounding Fed policy has continually asked if
the Fed is "behind the curve," or keeping interest rates below
where the economy indicates they ought to be.

Friday's jobs report was slightly worse than expected, but
overall still solid and marks the
sixth straight month of monthly job gains over 200,000, the
longest such streak since 1997.

But with wage growth tepid, and the economy appearing to grow
in-line with the Fed's expectations, it seems that at least for
now Janet Yellen's hand will not be forced.